The Nigerian Code of Corporate Governance: Principle 28 – Disclosures
Full and comprehensive disclosure of all matters material to investors and stakeholders, and of matters set out in this Code, ensures proper monitoring of its implementation which engenders good corporate governance practice.”
Corporate Disclosures constitute an important aspect of Corporate Governance. According to Healy and Palepu, the main aim of corporate disclosures is “to communicate firm performance and governance to outside investors”. This communication is not only required by shareholders and investors to evaluate their investments, but also for the benefit of other stakeholders (including prospective investors and those), particularly information relating to corporate social and environmental policies.
With increased scrutiny and regulatory oversight on enterprises, it has become imperative that companies communicate more effectively with stakeholders. Corporate disclosures encourage efficient management of enterprises and better-run companies, in turn, contribute to greater economic efficiency and a greater capacity to generate wealth. This is important because it is not only the investor that benefits ultimately the whole society has something to gain.
Disclosure can be in the form of financial reporting which essentially entails financial statements that are in accordance with defined accounting standards as well as non-financial reporting, comprising governance, environmental, social and sustainability reporting.
The Nigerian Code of Corporate Governance (NCCG) recommends that companies issue a corporate governance report that provides clear information on the company’s governance structures, policies and practices as well as environmental and social risks and opportunities in their Annual Report.
Governance practices affect company performance and are an important element in risk evaluation both for individual companies and for markets. Reporting is considered as the most effective tool to harness the benefits of good corporate governance practices. Reporting puts corporate information in the hands of the public and prospective investors make investment decisions based on this information. The market functions best when there is access to sufficient information to properly assess good governance, which is a recipe for sustainable performance.
The Code recommends that the Board should use its best judgment to disclose any material matter even though not specifically required by the Code if in the opinion of the Board such matter is capable of affecting the present or anticipated financial condition of the Company or its status as a going concern. The onus of proof of such possible negative effect is on the Board. This provision of the Code envisages information within the exclusive knowledge of the Board which could impact the performance of the Company and the market. The Code has placed the responsibility to disclose such information on the Board.
The Code recommends that the highlights of sustainability policies and programmes covering social issues such as corruption, community service, including environmental protection, serious diseases and matters of general environmental, social and governance (ESG) initiatives should be included in the corporate governance report to be disclosed in the annual report. Corporate Social Responsibility is becoming more important to investors because they are concerned about where and how their money is spent.
The Board has the responsibility to ensure the company has insider trading and conflict of interest policies. The Code recommends that the Board should ensure that the specific nature of any related party relationships and transactions conducted during the financial year are disclosed in the corporate governance report. The disclosure of related party transactions gives the public assurance of the transparency of the Board’s activities.
The NCCG recommends that where the Board has engaged independent experts to evaluate and report on the extent of the Company’s application of this Code, the name of the external consultant and a summary of the evaluation report should be included in the Company’s annual report. The inclusion of the name of the independent evaluation consultant and the summary report reposes public confidence and provides additional credibility to the information disclosed in the annual report.
It is global best practice to have a diverse board to ensure fresh perspectives and ideas to achieve the Company’s objectives. The NCCG recommends that the Board should disclose in the annual report its plan for achieving gender diversity in accordance with its diversity policy, the progress towards achieving the plan and the proportion of women employees in the whole organization, including women in executive management positions and women on the Board.
The Code recommends a disclosure of all the fines and penalties imposed on the Company by regulators at the end of the reporting period. Shareholders and other stakeholders can then track the improvement or otherwise in compliance over the years. Investors are more inclined to trust companies who have a good compliance record.
However, a major area of concern with respect to mandatory disclosures relates to sensitive information (marketing strategies, research, new product development, market entry, etc.) that could deprive companies of their hard-won competitive advantage. Others include bargaining disadvantage from disclosure to suppliers, customers and employees (employees demand higher wages with improved corporate earnings) as well as frivolous suits.
Whilst, disclosure is seen as a good thing in the eyes of investors and other stakeholders, too much disclosure can lead to information overload and can also become a burden to market participants. Furthermore, the disclosures of one company may not be appropriate for another company. Given the variability in company characteristics and circumstances, one size disclosure does not fit all, and the degree of comparability with other companies’ disclosure is not the most appropriate standard by which to judge the quality of disclosure.
One way of preventing information overload and assuring that just the right amount of information is made available is to adopt a disclosure management process that allows for the roll-over of past reporting templates. Companies can this way, update relevant information periodically, using a defined template with the adequate balance of mandatory and voluntary disclosures.